A 5th Economic Condition?

[stone]

doodle, I just googled and came up with something that backs up your claim that there is a move to other countries bonds:

http://www.telegraph.co.uk/finance/pers ... funds.html
"it’s worth noting that the Abu Dhabi Sovereign Wealth Fund which still invests $680m a day, is 20 per cent invested in global bonds with no bond exposure at all to the UK, US or Euro."

I guess the move might be a steady creep rather than an event and might just steadily shift the exchange rate rather than increase yields. For me what is telling is that I guess if you had had a Brazilian PP for the past 11 years, you would have been overall rebalancing INTO gold. Some people say that something "has to give" without appreciating that something (slide of developed world currencies versus emerging market currencies) has been going on all along. Might that currency slide take all of the strain and so mean that no "event" ever needed to occur? Personally I don't see that it is implausible that the debt/GDP ratio will climb to 200%, 500%, 5000%, 50000% and keep going. Bonds get used as collateral to create bank conjured money to buy more bonds. Yields could be resolutely sub-inflation and developed world wage inflation could be non-existent. The developed world currencies could continue to slide and the 1B people in the developed world lose our (hard to explain) greater affluence as compared to the 6B people in the developing world.
Isn't it true that profits come from the consumption of those owning the means of production? If ownership becomes more concentrated to the extent that consumption by the owners is overwhelmed by the yield of what they own, then things are bound to slump.
From Wikipeadia:
"For someone who has not seen before the preceding relationship, it might after a rigorous examination seem somewhat paradoxical. If the capitalists consume more, obviously the amount of funds which they have at the end of the year should be less. However, this reasoning, obvious the individual entrepreneur, is not true for the business class as a whole, as the consumption of one capitalist becomes part of the profits of another. In a way , they are masters of their fate."

[stone]

Medium Tex, "The one and only way that an emerging market economy can become self sustaining is if a domestic middle class emerges.  The problem, though, is that a middle class demands a lot more than the peasantry, including human rights, access to the political system, protection of property rights and free expression of political beliefs.  Does anyone really think communist China is about to allow such a class to emerge?  How about Russia?"

The thing is that Singapore has zero political freedom and yet is very middle class and affluent. Also we in the West are getting ruled over more and more by oligarchs. The political funding is more and more coming from oligarchs. Tony Blaire got $20M in "lecturing fees" from financiers the moment he left office. Rupert Murdoch may have hit a tricky patch but overall the tide is the West becoming more of a peasant/oligarch system and the emerging markets getting growing middle classes.

[MediumTex]

The thing is that Singapore has zero political freedom and yet is very middle class and affluent. Also we in the West are getting ruled over more and more by oligarchs. The political funding is more and more coming from oligarchs. Tony Blaire got $20M in "lecturing fees" from financiers the moment he left office. Rupert Murdoch may have hit a tricky patch but overall the tide is the West becoming more of a peasant/oligarch system and the emerging markets getting growing middle classes.

I would say Singapore is more like an exception than a rule.

I am, however, interested in your thoughts on my theory from a global perspective.  Would you say that it is generally accurate or generally inaccurate?

With respect to the peasant/oligarch trend in developed societies, I think that the "peasants" in these situations are still living like kings compared to the average person in the developing world.

[moda0306]

With respect to the peasant/oligarch trend in developed societies, I think that the "peasants" in these situations are still living like kings compared to the average person in the developing world.

MT,

I think this, along with the widespread accessibility to consumer debt that soften some of the wealth-distribution visual cues (a lowly janitor or carpet cleaner (sorry, had to poke fun) could drive a nice car, have a boat and live in a McMansion), are why our wealth distribution could split so hard and far in the 80's and 90's and 2000's without some kind of populist uprising, whether literal or just in the ballot box.

The poor and many of the middle class and even some wealthy in the US are living in this debt-fuelled fantasy land where kings and serfs both live on the same block and drive the same car.  You're not going to see revolution in a country like that until you drop a deleveraging hammer down and see who's still got their pants around their waist and who's got them around their ankles.

[Gumby]

We WILL have to compete with a deeper international bond market.

Can you describe what a world would look like where Treasuries weren't the #1 safe-haven/risk-off asset?

Don't forget that all of that those Treasuries would still have to exist, held by someone, somewhere. They won't just disappear in a cloud of smoke. The sold Treasuries would have to go to new owners or become so worthless that nobody trades them anymore (i.e. death of the dollar). How do you see that happening without an end-of-the world scenario?

For example. China would sell a lot of its Treasuries — sparking an instant loss in the faith of the dollar. China would get worthless US dollars in exchange for their Treasuries, and either invest that money in the US, or presumably trade those worthless US dollars on the open market for foreign currencies in hopes of moving to other foreign bonds.

Or I suppose China (and others) could stop buying US Treasuries, but that would mean that they aren't doing any business with the United States anymore. That would be detrimental to the world economy. End of the world as we know it.

I don't see the mechanics of that working without an Armageddon scenario unfolding.

If you're investing with the "end of the world" as your final outcome, you may want to think about moving to Switzerland permanently and only holding physical hard assets. I can't think of any other way to save yourself from that end of the world you're banking on.

[doodle]

Gumby: Can you describe what a world would look like where Treasuries weren't the #1 safe-haven/risk-off asset?

I can imagine such a world very easily. Maybe not next week but certainly within a decade. I was lucky to grow up all over the world and have travelled extensively. In some regards there is a culture of organization and structure in the United States that seems somewhat lacking in the developing world. At times travelling through Turkey, Egypt, or South America I wondered if they would ever be able to achieve the structure and development that our society has reached.

Nevertheless, I do believe that the world is "flattening out" as Tom Friedman says. The United States has pretty much run through its "WW II dividend" and although we are still king of the mountain and will be for a while there are a lot of other people building their own hills.

What this will mean in my mind for treasuries (as with all investments) is that the United States will no longer be the premier capital market that will be able to attract the worlds capital while giving out a subinflation return. Just as our workers are learning that they will have to compete in an international job market instead of a local one, our capital markets will soon have to compete with Shanghai, Jakarta, Sao Paulo, Mumbai etc.

Americans need to be careful about constantly underestimating their competition.

[moda0306]

doodle,

If rates start to rise "too fast," how much more inflation will result from us simply monetizing the interest payments?

[doodle]

Moda,

It seems pretty clear to me that the debt will be monetized. My worry is that even under the unimaginably severe Ryan plan, we still are adding significant debt to the balance sheet over the next ten years.

Capital in general searches out the safest and most productive investments. Can you honestly say that on our current trajectory that you think treasury bonds will continue to be this investment?

Can anyone give me an example of where a world hegemon became more and more indebted and didn't suffer an ugly fate?

In my mind it won't be China, or Brazil, or Russia, or any one country that knocks us off our perch. It will be a combination of all of them.

[doodle]

Moda,

Regarding how monetization will affect interest rates....I'm not sure.

I guess it would depend how much they are being monetized. Would you park your money in treasuries if you were getting a negative 3% return....while the government was running trillion dollar deficits for as long as the eye could see?

[MediumTex]

Americans need to be careful about constantly underestimating their competition.

That's an interesting perspective.

I might argue the opposite--that America should stop overestimating its competition.

For example:

- In the 1950s-1980s, the U.S. was endlessly concerned about the USSR as a competing political and economic system.  In retrospect, the collapse of the USSR seems inevitable and one wonders how it hung on as long as it did.  The USSR simply wasn't as potent a political, economic and cultural force as we thought it was.

- In the 1980s, the U.S. was very concerned that the Japanese were going to take over the U.S.  In retrospect, this fear seems misplaced.

- In the 2000s, the U.S. spent enormous sums chasing around a largely invisible enemy in the form of certain terrorist groups.  As far as I can tell, this fear was enormously profitable for certain defense contractors, but I don't know if the real risk was as great as imagined.  9/11 was an incredibly lucky stroke on the part of the bad guys.  It's hard to imagine an operation like that coming together again.

- Today, we are concerned about China.  We believe that China will take over the U.S.'s position as the lone world superpower.  What people seem not to notice is that China is in many ways a very bizarre political and economic experiment.  It is a command economy run by communists that people imagine to be a smoothly running capitalist machine.  What is this belief based upon?  Apparently, it is the economic figures provided by the communist government, just like the USSR used to do.  Is China ready to be a modern state?  I'm not all that impressed so far.  It looks to me a lot more like Walmart's back office operation right now.

- Looking forward, I'm sure we will become concerned about India at some point, even though India is one of the most bureaucratic, backward and politically delusional countries in the world (as an example, they provide foreign aid to countries with far less poverty than they have within their own borders--that's a strange thing to do).

Are we underestimating or overstimating our competition right now?  History suggests we are more likely to overestimate them than underestimate them. 

Doodle, is there another nation than the U.S. where you would rather live?  If so, where and why?  I'm just curious.  For me, I would rather be here than anywhere else, even though I find our politicians' lack of wisdom and leadership disappointing.

[MediumTex]

In my mind it won't be China, or Brazil, or Russia, or any one country that knocks us off our perch. It will be a combination of all of them.

All three of these countries have enormous vested interests in the continued vitality of the U.S.  Why would they desire to "knock us off our perch" if they would be harmed as a result?

Just to cite one example, think of how much military spending the rest of the world would have to undertake if the U.S. all of the sudden stopped acting as the world's policeman.  If I was Brazil, I would be so happy that the U.S. seems committed to maintaing political stability in all of the Americas, because that would mean I didn't have to worry as much about one of my neighbors falling into a chaotic revolution that could spill over into my country.

[Gumby]

What this will mean in my mind for treasuries (as with all investments) is that the United States will no longer be the premier capital market that will be able to attract the worlds capital while giving out a subinflation return. Just as our workers are learning that they will have to compete in an international job market instead of a local one, our capital markets will soon have to compete with Shanghai, Jakarta, Sao Paulo, Mumbai etc.

Doodle, I don't understand your logic. You talk about Americans losing their jobs to the rest of the world. But, that implies a deflation, big time. Long Term Treasuries win in that situation. So, how can we have high inflation — when nobody in this country has any jobs or money — without an 'end of the world' situation arising??

You seem to be avoiding this issue for some reason. Can't figure out why.

[moda0306]

I think the issue of trying to have simultaneously catastrophic inflation AND disastrously high unemployment and jobs continuing to be shipped overseas, while not impossible, implies some amazingly uncommon and unrelated political/social upheaval.

This kind of upheaval by a country as stable as the US would imply insane amounts of upheaval around the world.  Not only that, but I think the upheaval would have to be the cause of the severe stagflation, not in some kind of self-fulfilling loop where some inflation caused enough unrest, violence and distrust to put it into a positive-feedback loop.

So I think we should start with that if we're going to have this arument, because short of that I haven't read anything that it shows me how we get into this kind of insane problem, much less without taking the whole world economy with it.

[doodle]

Gumby,

I think that we are in a deflationary environment. A credit bubble bursting should be deflationary which DOES make me want to buy treasuries. The issue is that the central bank will not let the deflation happen and will continue to print money out the wazoo. We are running govt deficits of more than 10% of GDP currently. How long can that continue? Forever??

According to Von Mises (who shared many of the same viewpoints as Harry Browne) this would lead to a "crack-up boom".  The irony seems to be that hyperinflationary "crack-up boom" stems from the government trying to prevent deflation.

I am not saying this outcome is set in stone by any means, I am simply laying it on the table as a possibilty. In other words, given our current situation I wouldn't take it off the table.

Medium Tex,

I agree that the US is the best country in the world to be in. I have never been in another country...including Austria and Switzerland..that I think has more going for it. Nevertheless, I like you am disppointed in our leadership and unfortunately, bad managers are capable of bankrupting even the greatest companies.  

[MediumTex]

I think the issue of trying to have simultaneously catastrophic inflation AND disastrously high unemployment and jobs continuing to be shipped overseas, while not impossible, implies some amazingly uncommon and unrelated political/social upheaval.

This kind of upheaval by a country as stable as the US would imply insane amounts of upheaval around the world.  Not only that, but I think the upheaval would have to be the cause of the severe stagflation, not in some kind of self-fulfilling loop where some inflation caused enough unrest, violence and distrust to put it into a positive-feedback loop.

So I think we should start with that if we're going to have this arument, because short of that I haven't read anything that it shows me how we get into this kind of insane problem, much less without taking the whole world economy with it.

People talk about social unrest coming to the U.S., but no one ever says when or how this is supposed to happen.  No matter how mad people get, I see almost no one interested in organized violent opposition. 

It seems to me that if people really wanted to change something, they could just go vote in new political leaders--no violence needed.

[doodle]

Moda,

I think there is more decoupling than some people here believe. We see this even within our own country. Unemployment rates in the Dakotas and some of the midwest are running at 5% or lower whereas Las Vegas is pushing 12%.

Our percentage of the world economy is slowly declining. As it does so....we matter less.

[MediumTex]

Our percentage of the world economy is slowly declining. As it does so....we matter less.

But what is the point of that observation?

Who cares if we matter less to other countries?  Does that mean we can also spend less to prop up a lot of these countries that have grown incredibly dependent upon us?  I would love to see that.

[doodle]

I think the decoupling and declining percentage of the world economy mostly concerns US ability to continue to attract future investment with low growth rates and low treasury yields.

If we continue to depend on trillions in bond sales every year to prop up our deflationary economy and these bond sales are not well received by the rest of the world because they are interested in other more lucrative avenues for their money, then we have an issue. Is the Fed going to continue to expand its balance sheet?

[moda0306]

doodle,

Ok, so what's the next step after the rest of the world starts disliking our bond yields... for the foreign countries to net-divest themselves of US dollars wouldn't they have to net-spend US dollars in the US?

Doesn't that mean our trade balance would then be positive?

Does that really sound like disaster?

I mean, yes, we'd have inflation, but it'd be because we're all driving to work to make lead/murcury-free widgets for China!

[Gumby]

According to Von Mises (who shared many of the same viewpoints as Harry Browne) this would lead to a "crack-up boom".  The irony seems to be that hyperinflationary "crack-up boom" stems from the government trying to prevent deflation.

I am not saying this outcome is set in stone by any means, I am simply laying it on the table as a possibilty. In other words, given our current situation I wouldn't take it off the table.

I get it. But, I don't see how you have a 'crack up boom' of Treasuries without the entire world going down with it. Do you see what I'm saying? So far, you haven't been able to give me a plausible explanation how this could happen without Armageddon. Walk me through it.

[MediumTex]

I think the decoupling and declining percentage of the world economy mostly concerns US ability to continue to attract future investment with low growth rates and low treasury yields.

If we continue to depend on trillions in bond sales every year to prop up our deflationary economy and these bond sales are not well received by the rest of the world because they are interested in other more lucrative avenues for their money, then we have an issue. Is the Fed going to continue to expand its balance sheet?

This same process is unfolding all over the industrialized world. 

The EU, UK and Japan are in the same boat as the U.S.

How is the U.S. different from any of these other countries, other than having larger natural resource deposits and far more military power?

[doodle]

Moda,

The Chinese are spending an increasing amount of their dollars on building commodity stockpiles. This doesn't affect our trade balance unless they come from us.

Medium Tex,

I think that the industrialized west IS ALL in a big pickle. We can fix this problem but we need to toughen up and buckle down.

Listen to Americans...

I just read that government workers here in my area recently flipped out because they didn't want to raise air conditioning from 76 degrees to like 79 degrees in order to save money.

There are tons of jobs picking fruits and vegetables in the Southeast as they crack down on illegals, but those jobs are tough and it is easier for Americans to walk down and collect unemployment.

We have become the fat, lazy, kid on the block who can't make it to first base in the wiffle ball game without having an asthma attack.

When our politicians start talking straight, and our population toughens up then I will put all of my money behind our country, because I do fundamentally believe we are exceptional. Unfortunately, I think it will take a crisis to wake our country up.

[moda0306]

Moda,

The Chinese are spending an increasing amount of their dollars on building commodity stockpiles. This doesn't affect our trade balance unless they come from us.  

Doodle,

Follow the money... if they're not buying the commodities from us, that means they're buying them from, say, Russia.  Now Russia has our dollars and has to buy the same bonds that China just redeemed.

That's not net-divestment.  Maybe China's getting a little sick of our dollars, but if Russia was a-ok accepting them, then we're in the same spot we were before, aren't we?

Walk me through the step where the rest of the world somehow net-divests themselves of dollars without spending them in the US... please... this, I believe, is vital to thinking through this whole topic.

[doodle]

You know why this forum is so unique? It is because it is about dialectic and not debate. It is like everyone here has been schooled in the Socratic method. Washington politicians would do well to observe the way that issues are hashed out here.

Regarding your question Moda, I will have to do some more reading. The way that money flows through all the channels of the world financial system and its myriad effects is admittidly something I haven't devoted a great deal of time studying.

I do know that the reserve currency status of the dollar does greatly prop up its value though. If SDR's were to replace the dollar, or if countries were to begin to conduct commodity trading in their own currencies, as opposed to using dollars,  then it would affect the demand for dollars in a negative fashion. What the ultimate ramifications of this are I am not sure.

How many dollars are there currently as part of foreign exchange reserves in other countries? What happens if we continued to dilute the value of these dollars by printing more? Are these countries going to stand idly by as we devalue their foreign exchange holdings? What could they do to stop us? Are you suggesting that there are no potential consequences to our actions?  

[moda0306]

I'm not sure how many of our dollars are part of foreign reserves.  If we try to dilute (enough of) the value of our dollars by printing more, as evidenced by some of my posts, I believe, that these countries will vote with their feet and start spending their dollars on something else... but as I said, as long as another country besides us is accepting the dollar China spends, I don't see much of an overall change of the lay of the land.  If we dilute them enough to make our dollars less valuable, the countries would all (probably starting slowly) attempt to spend their dollars to buy other currencies or goods, but when I say "countries," I mean ALL of them and as a unit.  They would have to net-spend dollars and we would have to net receive them.  I believe this would manifest itself in a more positive trade balance.

I honestly can say I don't know all that much about the intricacies of international multi-currency finance, but to me it comes down to a simple system of supply and demand, and "foreign" demand can't drop until they get rid of it here.  Greece can't sell their US dollars to Zimbabwe and there all of a sudden is a crisis... the natural tendency for our dollars to leave the banks of the rest of the world is for them to reenter the US... and they're not going to give it to us for free... they'll want our lead-free toys.

This is how I describe it, but I haven't heard it in exactly those terms from another financial or economist whiz.

Mostly what you hear from them is that "when we devalue it improves our trade balance."  I simply put it the way I do so it's easier to tell that you HAVE to (or would seem to) have INCREASED foreign demand for our goods for them to show net-divestment of our currency... and that the movement of $$'s amongst other foreign nations don't matter... they still have to invest in our bonds unless they spend the money here.

I agree that I like the fact that we try to challenge ourselves and each other to think broader, and this doesn't turn into a pissing contest.